Update Aug 17, 2011: Stock is down 7% at 14.70 on the opening following disappointing revenue guidance last night…..the Put Butter Fly detailed below is now worth about .25 but I think there is a good chance the stock could settle in somewhere below 15…….I am going to hold out here and possibly use a stop of what I paid for the spread to get out so I don’t lose on the trade….also factor is commissions into your stop calculation as with so many legs in and out that could be considerable….I will update when I take this off.
Original Post Aug 16th 2011: DELL Earnings Preview With Short-Term, Low Premium Bearish Structure
-Company reports their fiscal Q2 today after the close.
-options market is currently implying about a 6.5% move vs the average move of about 5.5% over the last 8 qtrs.
Sentiment and Price Action:
-Street fairly mixed on the name with 19 Buys, 18 Holds and 4 Sells.
-Latest reading on short interest remains fairly high for the name at almost 5%.
-Stock is up 15% ytd vs the Nasdaq which is down about 5%.
-Believe it or not, expectations are not low heading into tonight’s print as the stock was making new 52 week highs in July.
-Bulls cite positive gross margin momentum after the last 2 quarters eps upside resulting from softer than expected component pricing. The last quarter also benefited from lower than expected tax rates and lower share count, which combined added .03 to the .04 beat……
-Those cautious on the name believe that the company is giving up lower margin revenues to help focus on profitability and in doing so may lose share in certain segments of storage and hardware. Also DELL receives about 1/3 of their revenues from the public sector and all signs point to a slowdown from govts the world over at a time where the company has quid ed this up sequentially.
MY VIEW: It;s hard to be negative on a turnaround at a company like DELL where there is so much potential for improvement and the company has so many levers to pull toward profitability. Balance sheet also pretty good too with half of their market cap in cash and about $7billion net of debt. The problem with the company to me is that they are in an ultra competitive, ultra comiditized space. Some in their space create desire for new products and set trends (AAPL), while others just are stuck with their scraps (DELL and HPQ).
The company is likely to benefit from the same tailwinds in the previous qtr (favorable tax rate, lower share count and weak component prices) and the valuation at 8x next years earnings is likely to buoy the stock. The real hiccup comes from what to do with their anemic revenue growth, only expected to be low single digits next yr. The company may have to use some of that cash to buy growth……and do not have the luxury of making silly purchases like MSFT of Skype or GOOG for MMI, they can’t afford to make bad purchases.
As usual the Guidance will be the driver here and I have to assume that the outlook just got a bit murkier.
TRADE: With expectations at what I perceive to be High heading into the print, I want to make a short term Bearish trade through Friday’s Expiration. While I don’t expect a disaster, if they dis-appoint the stock could easily go back through 15 this week.
DELL $15.70 BUY AUG 15/14/13 Put Butterfly for .16
-Buy 1 Aug 15 Put for .34
-Sell 2 Aug 14 Puts for a total of .24 (.12 each)
-Buy 1 Aug 13 Put for .06
Break-Even On Aug Exp (this Friday):
Profit: btwn 14.84 and 14 make up to .84, at 14 make full .84 and btwn 14 and 13.16 profit trails off.
Loses: above 15 lose all .16 premium paid, btwn 15 and 14.84 lose up to .16, btwn 13.16 and 13 lose up to .16 and below 13 lose .16.
TRADE RATIONALE: This is purely a sentiment trade, I can’t imagine in this environment that management will stick out their necks and offer an overly aggressive outlook, especially when you consider that they rely on the public sector for almost 30% of their total sales. Any disappointment in the qtr that just ended and the outlook and this stock likely goes back to support at 14.00.
This trade structure isolates that range while not spending too much premium with a fairly decent 5 to 1 payout…….
As always use limits in multi-leg structures, disciplined execution can increase your chances of profitability or at the very least break-even.